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Chapter 15: Question 4Q (page 810)

Why is the distinction between paid-in capital and retained earnings important?

Short Answer

Expert verified

Paid in capital reflects investments made by equity holders, while retained earnings reflect the balance of profits in the business.

Step by step solution

01

Definition of Retained Earnings

An organization's retained earnings are the profits left over after they have deducted their direct expenses, indirect expenses, income taxes, and dividends to shareholders.

02

Distinction between Paid-In Capital and Retained Earnings

The legal right to declare dividends out of retained earnings is available in all states, but out of paid-in capital is not allowed in many states. A corporation's continued existence and growth are determined by its earnings, which are viewed by management, shareholders, and others. In comparison, paid-in capital shows the value of the investment made by the investor in the company. Retained earnings are determined to measure the profit remains for the year; on the other hand, paid-up capital is used to measure a company's capital valuation.

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Most popular questions from this chapter

Sprinkle Inc. has outstanding 10,000 shares of \(10 par value common stock. On July 1, 2017, Sprinkle reacquired 100 shares at \)87 per share. On September 1, Sprinkle reissued 60 shares at \(90 per share. On November 1, Sprinkle reissued 40 shares at \)83 per share. Prepare Sprinkle鈥檚 journal entries to record these transactions using the cost method.

What factors influence the dividend policy of a company?

Pistons Inc. recently hired a new accountant with extensive experience in accounting for partnerships. Because of the pressure of the new job, the accountant was unable to review what he had learned earlier about corporation accounting. During the first month, he made the following entries for the corporation鈥檚 capital stock.

S.no.

Particular

Folio

Debit \(

Credit \)

May 2

Cash

192,000

Capital Stock

192,000

(Issued 12,000 shares of \(5 par value common stock at \)16 per share)

May 10

Cash

600,000

Capital Stock

600,000

(Issued 10,000 shares of \(30 par value preferred stock at \)60 per share)

May 15

Capital Stock

15,000

Cash

15,000

(Purchased 1,000 shares of common stock for the treasury at \(15 per share)

May 31

Cash

8,500

Capital Stock

5,000

Gain on Sale of Stock

3,500

(Sold 500 shares of treasury stock at \)17 per share)

Instructions

On the basis of the explanation for each entry, prepare the entries that should have been made for the capital stock transactions.

Weisberg Corporation has 10,000 shares of \(100 par value, 6%, preference shares and 50,000 ordinary shares of \)10 par value outstanding at December 31, 2017.

Instructions

Answer the questions in each of the following independent situations.

  1. If the preference shares are cumulative and dividends were last paid on the preference shares on December 31, 2014, what are the dividends in arrears that should be reported on the December 31, 2017, statement of financial position? How should these dividends be reported?
  2. If the preference shares are convertible into seven shares of \(10 par value ordinary shares and 3,000 shares are converted, what entry is required for the conversion, assuming the preference shares were issued at par value?
  3. If the preference shares were issued at \)107 per share, how should the preference shares be reported in the equity section?

Joe Dumars Company has outstanding 40,000 shares of \(5 par common stock, which had been issued at \)30 per share. Joe Dumars then entered into the following transactions.

  1. Purchased 5,000 treasury shares at \(45 per share.
  2. Resold 2,000 of the treasury shares at \)49 per share.
  3. Resold 500 of the treasury shares at $40 per share.

Instructions

Use the following code to indicate the effect each of the three transactions has on the financial statement categories listed in the table below, assuming Joe Dumars Company uses the cost method (I = Increase; D = Decrease; NE = No effect).

#

Asset

Liabilities

Stockholders鈥� Equity

Paid-in Capital

Retained

Earnings

Net Income

1

2

3
See all solutions

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